Need for another option for banking…

Recently there have been a plethora of calls (well from within the blogging community anyway) for some kind of banking 2.0 offering.

Latest is this post from Bwooce where he makes the suggestion that telcos could leverage their existing platform networks and roll outs some kind of transactional infrastructure to circumvent banking.

One of the start-ups I’m currently involved with is thinking very much down this line, we live in an age of instant information and total connectedness, it seems crazy that our financial/transactional exchanges aren’t keeping up with the progress.

When alignment occurs, lots of good stuff will happen – in the same way that Rod states that taking accounting online unlocks a whole heap of value add for SMEs, so does bringing banking and transactions into the fold.

5 Comments

Telcos have toyed with the idea of being payments channels for most of the last 20 years. Except in very special situations in one or two markets, I’ve not seen a telco succeed anywhere internationally. The reason that telcos and banks do not compete is the fundamentally different way they think about their businesses. Telcos make massive capital investments in networks, drive traffic over those networks (making margins of 30-70%) – billing customers for those services is their sole source of revenue. Banks make tiny percentages (0.5-4%) on banking transactions (especially from merchants and hidden from the end-customer), but also make money (which often subsidises their account fees) by borrowing and lending. Billing for services isn’t such a big thing for them.

So telcos and banks think very differently – they are at heart very different businesses.

Banks make money by virtue of their ability to create money into existence by issuing new loans at interest whilst keeping a fraction of the required capital in reserve. This is known as fractional reserve banking.

So there are 2 issues: one is taking business from banks by creating lending spaces which cut them out of the action. The second is actually participating the the process of creating money itself.

There are some interesting legal cases looking at issue 2 happening at the moment.

I’ll do a quick blog looking at how the Bank of England kicked it all off.

Raf is correct in his claim that banks create money out of nothing through the fractional reserve banking system as I proved in a previous post, (http://tinyurl.com/2y7fbp), without which the West would not have achieved the levels of prosperity that we benefit from today, because it is literally impossible to grow the economy without lending out multiples of bank reserves if you want to guarantee the deposits of people who have deposited their money in the bank, although the system has many drawbacks, which have had devastating consequences throughout history.

I have been ruminating on how to wrest the monopoly to issue credit from the private banking establishment for some time and I believe I’ve come up with a solution.

I’ve been researching various alternative/complementary options for some time now and stumbled across the Ripple monetary system concept, which has an added advantage of having the potential of being widely adopted right now with slight modifications to the design and implementation.http://ripple.sourceforge.net/

What the ripple system facilitates is for everyone to become financial intermediaries through virtual trust networks (social networks, darknets, online communities etc).

My evolution of the vision would be a synthisis of the Ripple monetary system, the Prosper microfinance system, and the Paypal payment processing system.

The design of the system is as follows.

The hybrid social lending system would act as a intermediary between bank accounts of potential borrowers and lenders, through the Ripple routing protocol, very much like Paypal does between clients and businesses.

Someone who needs to borrow a sum of money would make it known to the system and the ripple protocol would attemept to find a chain of credit connections between the borrower and the payment recipient (a busines) and will then adjust your respective (intermidiary) accounts to reflect the transaction that had taken place.

This is where we are headed so I’m all ears. I’ve come across Ripple before but haven’t got round to reading up on it. I’ve just had a quick look at Ryan’s paper and I have some questions for him.

Think of Visa and the way that works. It’s very similar in terms of a clearing house for transactions.

Given the fractional reserve system we know that money is simply an interest bearing IOU. There is nothing to stop me printing Raf$ and paying people with them except the Reserve Bank Act which prohibits the creation of money by anyone except the RB.

Of course they fail to realise that the banks are creating money though not overtly as in printing the stuff. As an aside this is a legal challenge waiting to happen. I don’t know if you have been to my website but there is information there on a potential challenge to the legality of bank created money.

I’ll post about Ripple on my blog and maybe you can add in some comments and we can take it from there. I’d be more than happy to give you feedback on your proposal.

Raf and Jamesy I am very interested in your discussion. Credit creation or deposit expansion is particularly interetsing to me. I am reffering here to the “single trading bank” line of debate. I invite you both to email me directly at boss@aalert.net Jamesy I would also like to hear more about the legality of bank created “money” / Credit.